Market Place; '89 Stock Winners Still on Top in '90

By FLOYD NORRIS

Published: December 31, 1990

If 1990 was a year when it was best not to own stocks, it was also a year when those who did own them were well advised to stay with the winners of 1989.

The old reliable consumer growth stocks, the ones that make products everyone buys, again led the 30 stocks in the Dow Jones industrial average, as they did in 1989. Procter & Gamble, Coca-Cola and Philip Morris were the top three stocks in 1990, as they were the year before.

The Dow is by far the best-known stock market average in America, but its inadequacy as a market measure is limited by its very nature: 30 large companies in a market that includes thousands. This year, that unrepresentative nature led to a picture of a market that was much kinder and gentler to investors than the reality.

Through Friday, the Dow was off just 4.5 percent for 1990, and 11 of the 30 stocks showed gains for the year. The Standard & Poor's 500, a more broadly based index of large stocks, was down 7 percent. And the Russell 2,000, which measures the small stocks ignored by larger indexes, fell 22.5 percent. All the figures include price performance only, ignoring dividends.

Within the Dow, the idea of going with a winner and avoiding losers was well illustrated. In 1989, a fine year for stocks, seven Dow stocks went down. Of those, five went down further in 1990. The worst performer in 1989, Navistar, improved its relative performance only a bit this year. It was next to last. Goodyear Tire and Rubber, the fourth-worst performer in 1989, moved into last place this year, with a stunning 56 percent drop.

The biggest turnaround on the up side this year came from International Business Machines, the company with the largest market capitalization in America and, in recent years, one of the more disappointing. It rose 20.5 percent, giving Big Blue shareholders their best year since 1985.

I.B.M. benefited from the successful introduction of its next generation of mainframes, as well as from the perception that its efforts to cut costs were finally paying off. And, after years of under-performance -- this was the first year since 1984 that I.B.M. shares outpaced the Dow average -- expectations may finally have been brought down to a level that was excessively pessimistic.

Over the years, one strategy of playing the Dow that has worked more often than not has been to buy the stocks least popular with investors, assuming that unloved stocks may grow to be worth more than expected.

Michael O'Higgins, an Albany investment manager and author of "Beating the Dow," to be published this week by HarperCollins, has developed a strategy of buying the 10 Dow stocks with the highest indicated yields at the end of each year, and holding them for a year. That assumes that the stocks with high yields have been driven to low prices by negative expectations in the market, and that at least some of those expectations will turn out to be unreasonable.

This year, the strategy was not a particularly great performer, with the 10 highest-yielding stocks of a year ago showing an average decline of 7.8 percent, before dividends, compared with a loss for the Dow of 4.5 percent. Including dividends, Mr. O'Higgins estimates, the 10 stocks had an average loss of 2.7 percent, while the Dow fell less than 1 percent.

The figure was pulled down by poor performances from Sears, Roebuck; Union Carbide; Allied-Signal, and General Motors, but helped by I.B.M. and a strong contingent of oil stocks that benefited from the Iraqi invasion of Kuwait. Those included Texaco, Exxon and Chevron. The other stocks among the 10 were Du Pont and Eastman Kodak. Gain of 1,511 Percent

Even with that poor performance, Mr. O'Higgins calculates that an investor who followed the strategy for the last 18 years would have a cumulative gain of 1,511 percent, compared with a rise of 495 percent in the Dow itself, having outperformed the Dow in 12 of the years.

The portfolio of high yielders for next year is led by Goodyear, which now has an indicated yield of 9.6 percent, based on a $1.80 annual dividend. There is more than a little doubt on Wall Street that Goodyear, burdened by debt from a corporate overhaul, will be able to pay the dividend if the recession continues, but so far it has not cut it.

The other stocks with high dividends as 1990 ends are General Motors, Sears, Allied-Signal, Texaco, Union Carbide, Exxon, Westinghouse Electric, Eastman Kodak and USX.

Table: "How the Dow Industrials Have Performed" shows the performance of the 30 stocks that make up the Dow Jones industrial average.